Impact of GST on the aviation industry

By Registrationwala

2nd May 2017

Good and Services Tax (GST) will see all the prevalent taxes in the country subsume into one tax, thus greatly simplifying the hassles and the confusion that multiple taxes on your bill bring. Some industries are also expected to benefit from it, given that their operational costs would be reduced and that they would reinvest the profit back into the industry, creating more jobs. Cut to the aviation industry and the scenes are different.

Aviation industry is one of the fastest growing industries in a developing India and is with middle-class growing in stature is expected to boom in the next few years. But in quite an anticlimax, as opposed to some other sectors, the airlines fear that they will not benefit from the GST bill, and worse will lose out on profit.

Given how important this industry is going to be in the decades to come, it is important to analyze the impact of GST on it.

Air travel is projected to get even costlier

It is projected that the GST on the air bookings will be higher than the current tax that is being levied on it.

At the moment, airlines pay a six percent service tax on economy bookings while a 9 percent tax on business class bookings. These are bore by the customer, of course. The airlines would have paid 15.5 percent instead, but the government relaxes it by 60 percent for the economy tickets and by 40 percent on the business class tickets, bringing the service tax down to six percent and nine percent accordingly.

Now the GST is expected to be between 17 to 19 percent. This is not final but only anticipated. GST model law mentions a GST of 17-19 percent on “demerited goods” and the industry fears that airlines might come under that bracket, which will also contain luxury cars. This will mean that the airlines will pay higher tax and that the customers will eventually pay higher prices for the tickets.

And if that was not enough, the jet fuel or the Aviation turbine Fuel (ATF) is not included in the purview of GST. The government has decided to keep it out of this, which means is that the Central and the State governments will continue to levy separate set of taxes on it, keeping the prices as high as they are now, if not pushing it up.

Right now, the airlines can stake a claim to cenvatcredit on the central excise duty they end up paying for the fuel. GST will not applicable to jet fuel, and the airlines will no longer be able to do so, given all petroleum products, including the aviation turbine fuel will be out of it. Thus, the credit of the tax paid on it is not allowed, meaning that the input costs will increase for the airlines, which means that the customers will have to bear the brunt in the form of increased ticket prices.

To explain it in simple terms, what happens currently is that airlines can offset the central excise tax against the service tax on the tickets. Once GSt goes live, the airlines can no longer claim money, to put it in the simplest of terms.

What is the way out? The government will need to subsidize it for the aviation sector to try and keep the tax to as close to the current figure as possible.

Compliance costs not all gone

How it works currently is that airline carriers only have to do one tax registration. Under the GST way of things, it will be different. Airline carriers will not only have to register in the state the passenger is located at but also in all the states the flight originates from. That will be hell lot of a registration. To make things worse, the companies are expected to upload all the details online.

This greatly increases the compliance costs for a company. So this will reflect in how much costlier doing this business can get. So no new players will break in and a monopoly will only lead of isolation of the market and eventual stagnation.

Impact on MRO service providers in India

Maintenance, Repair and Overhaul (MRO) qualify as goods and services, and both service tax and VAT are applicable on it. Now this VAT cannot be offset against the service tax, so it adds to the cost for the airlines.

To avoid this, the carriers avail MRO services outside of India. The new GST law deems it as services and specifies that irrespective of where the MRO services are received, if the carrier operates in India, the MRO service will be assumed to be done in India and the GST will be levied on it.

To make things worse, the airline carriers also renew their leases outside of India to evade the VAT.

What GST will do is to give more importance to the MRO service providers in India, thus helping them catch up with their where their contemporaries in other countries are.

Cross-Border leasing now under GST

Most of the modern airline carriers lease their fleet of aircrafts from a leasing company. Since this comes under the purview of VAT in India, the companies prefer to do the transaction outside of India.

Now, GST says that these transactions come under the radar of GST because it regards leasing a s service. So whether the transaction is in Delhi or Tokyo it cannot evade GST.

Ticket structure will be realigned.

Why is this worse is because the payment to these leasing companies have to be made beforehand. Now the companies have a GST to deal with, too. Though GST could be taken as credit, but it will be compensated only when the tickets go live, the consumers buy it and put you into profit. That is a long process and the new GSt law threatens to create a severe dearth of cash flow in the ecosystem.

Import price will increase

GST will be applicable to these, whether the purchase is made in India or abroad.

Change in the entire ticketing structure

Every air ticket in India is subject to a service tax. For example, on a Kolkata-Chicago-Kolkata flight, the service tax would be charged because the loading happens at Kolkata but say the flight is Chicago-Kolkata-Chicago. In this case, there is no service tax applicable.

In a Kolkata-Bangalore-Kolkata flight, the entire ticket will attract a service charge.

Under the GST regime, a journey would be broken down into many bits and a GST would be charged separately on each of them. So return journey will different to the arrival journey.

In the aforementioned example, Kolkata-Chicago will attract a GST in Kolkata. In the other example, for the Kolkata-Bangalore journey, the GST will be applicable in Kolkata and for the Bangalore-Kolkata leg, the GST will be charged at Bangalore.

Since the current system does not work that way, ti will need a major overhaul to the new GST way of doing things.

Conclusion

Airlines are not one of the booming industries and GST threatens to take it nowhere, if now below where they are now. The ticket prices are projected to increase because the airline operational and input costs will increase. The MRO industries will benefit but it is a very small benefit in comparison to the loss.

What the government can do is to consider discounting the air fuel out of GST.